ISS invites you to join us for a webinar on corporate governance reforms through securities class actions. The webinar will examine the rise of institutional lead plaintiffs, the impact of institutional lead plaintiffs on settlement size and attorneys' fees, key settlements with governance reforms, and the future of reform through securities class actions.

The hour-long webinar will start at 2:00 P.M. EDT. To register please click here. To read a recent Securities Litigation Watch blog posting on this subject click here.

As head of research for ISS' Securities Class Action Services, I will moderate the panel. I will be joined by the following distinguished guest speakers:

Among their many publications, Professor Cox and Professor Thomas have co-authored several important articles addressing securities class actions and governance issues including Does the Plaintiff Matter?: An Empirical Analysis of Lead Plaintiffs in Securities Class Actions, 100 Columbia Law Review 101-155(2006), and There Are Plaintiffs and ... There Are Plaintiffs: An Empirical Analysis of Securities Class Action Settlements, 61 Vanderbilt Law Review 355-386 (2008). They also co-authored the often cited essay Leaving Money On the Table: Do Institutional Investors Fail to File Claims in Securities Class Actions?, 80 Washington University Law Quarterly 855-881.

As institutional shareholder activism has increased over the past 30 years, so has the breadth and sophistication of its methodology. Since the mid-1990s, securities class action lawsuits in particular have played an important role in this evolution. Institutional activism through securities class actions has since grown into an unusually effective and increasingly prevalent method for increasing class recoveries, reducing litigation costs, and effectuating corporate governance reform.

On Friday the Federal Housing Finance Agency (FHFA), which manages Fannie Mae and Freddie Mac, filed a number of law suits against the following 17 financial institutions in connection with their sale of almost $200 billion in residential private-lable mortgaged-backed securities to Fannie and Freddie.

1. Ally Financial Inc. f/k/a GMAC, LLC
2. Bank of America Corporation
3. Barclays Bank PLC
4. Citigroup, Inc.
5. Countrywide Financial Corporation
6. Credit Suisse Holdings (USA), Inc.
7. Deutsche Bank AG
8. First Horizon National Corporation
9. General Electric Company
10. Goldman Sachs & Co.
11. HSBC North America Holdings, Inc.
12. JPMorgan Chase & Co.
13. Merrill Lynch & Co. / First Franklin Financial Corp.
14. Morgan Stanley
15. Nomura Holding America Inc.
16. The Royal Bank of Scotland Group PLC
17. Société Générale

The Supreme Court's June 2011 decision in Wal-Mart Stores, Inc. v. Dukes appears to stiffen the class certification standards in employment discrimination class action cases. A broader question, however, is whether the Court's opinion will have an impact on other class action types, such as those involving alleged violations of the securities laws. This important question may have its first test in the pending class action against bailed-out insurer American International Group (AIG). In its consolidated complaint filed on  May 19, 2009, a nation-wide class of investors led by the State of Michigan Retirement System (SMRS) sued AIG for violations of the securities laws in connection with its role in the mortgage-backed security crisis. On August 17, 2011, in a memorandum of law in opposition to SMRS's motion for certification, AIG became one of the first defendants to assert the Wal-Mart v. Dukes opinion in an attempt to defeat certification in a securities class action.

Background

For a federal securities class action to survive the court must certify the class pursuant to Federal Rule of Civil Procedure 23. This requires that the class must satisfy several elements of the certification test including commonality, adequacy, numerosity, and typicality among others. In the Wal-Mart case the primary focus was on the commonality prong of the test, or the requirement that "there are questions of law or fact common to the class." 

Wal-Mart v. Dukes was an employment discrimination suit brought on behalf of all female Wal-Mart employees. The class of female employees asserted that Wal-Mart's practice of allowing its managers discretion over pay and promotions, and their unwillingness to "cabin" or limit that discretion, was a "policy" that created a disparate impact on all female Wal-Mart employees.

As discussed here by Securities Litigation Watch, while credit-crisis securities class action filings have seemingly dropped off the map credit crisis related settlements are just hitting their stride. Today, lead plaintiff counsel in In Re Wachovia Preferred Securities and Bond/Notes Litigation announced a $627 million settlement against Wells Fargo, who acquired Wachovia in early October 2008 for $12.7 billion. The deal, also reflected in Wells Fargo's Quarterly Report to the SEC today, is comprised of a $590 million settlement with Wachovia and its affiliated entities and an additional $37 million settlement with Wachovia's auditor, KPMG LLP.

The consolidated class action complaint, filed by lead plaintiffs Orange County Employees' Retirement System, the Louisiana Sheriffs' Pension and Relief Fund, and the Southeastern Pennsylvania Transportation Authority, accused Wachovia of making misleading disclosures relating to the sale of securities between 2006 and 2008. The statements related to the quality of assets linked to the mortgage portfolio of Golden West Financial, a California home lender it had acquired. Specifically, the claims asserted that the Wachovia offering materials at issue misrepresented and/or omitted to disclose material facts concerning the nature and quality of Wachovia's  "Pick-A-Pay" mortgage loan portfolio, and that Wachovia's publicly disclosed loan loss reserves were in violation of Generally Accepted Accounting Principles ("GAAP").

According to Bloomberg News, Wells Fargo agreed to the settlement in order to avoid the "distraction, risk and expense of ongoing litigation," but admits no liability on the part of Wachovia. If the settlement is ultimately approved by Judge Richard J. Sullivan of the U.S. District Court for the Southern District of New York it would be among the 14th or 15th largest securities class action recoveries. It would also eclipse the Countrywide settlement ($624 million) as the largest credit-crisis related settlement to date. According to MarketWatch it is believed to be the largest settlement ever in a class action case asserting only claims under the Securities Act of 1933. And, it represents one of the handful of largest securities class action recoveries ever obtained where there were no parallel civil or criminal securities fraud actions brought by government authorities.

ISS invites you to join us for a webinar on the impact of the U.S. Supreme Court’s historic Morrison v. National Australia Bank decision, which continues to have major implications for pension funds and other institutions that own shares in non-U.S. companies. The webinar will examine the Morrison decision, how it has been interpreted by lower courts in the year since it was decided, relevant SEC developments, and the impact on both U.S. and international market participants.

The hour-long webinar will start at 11 A.M. EDT (4:00 P.M. BST, 5:00 P.M. CEST). As head of research for ISS' Securities Class Action Services, I will moderate the panel. I will be joined by the following distinguished guest speakers:

*Beata Gocyk-Farber, a partner with Bernstein Litowitz Berger & Grossman LLP. Her practice focuses on securities fraud actions, complex commercial litigation, and trial practice. She was a senior member of the litigation and trial teams of some of the most noteworthy securities class actions in history, including the WorldCom and HealthSouth litigation. Gocyk-Farber also is in charge of the firm’s European institutional investor relations and is counsel to many of the firm’s European-based clients.

*Deborah R. Hensler, PH.D., Judge John W. Ford Professor of Dispute Resolution and Associate Dean, Graduate Studies, Stanford Law School. Professor Hensler is the organizer of the Stanford Globalization of Class Actions Exchange, which is spearheading international research on class actions and mass litigation, and the co-editor of the recently published volume, The Globalization of Class Actions. Professor Hensler is an associate research fellow of the Oxford Centre for Socio-Legal Studies, has taught at the University of Melbourne (Australia), and has been awarded a visiting professorship to Tilburg University by the Royal Netherlands Academy of Arts and Sciences.

To register for this webinar, please click here. To read a recent Securities Litigation Watch blog posting on the Morrison decision, please click here.

On July 18, 2002, a massive multinational shareholder class filed suit against Vivendi alleging that the French entertainment giant made false or misleading statements regarding its financial health in 2001 and 2002. In a securities class action environment where jury verdicts are almost unheard of, on January 29, 2010 a jury found that Vivendi made 57 false or misleading statements regarding its financial health in 2001 and 2002. The verdict, reached after fourteen days of deliberation and a three month trial, was estimated by counsel to be a whopping $9 billion ($4 billion in potential actual damages plus up to $5 billion in prejudgment interest).

The success of plaintiffs' counsel in Vivendi was short-lived, however.  Vivendi's ordinary shares traded on the Paris Bourse while its American Depository Receipts (ADRs) were listed and traded on the NYSE. Following the Morrison v. NAB decision (discussed by Securities Litigation Watch here), the question remained whether Morrison's "transactional test" would preclude a portion of the Vivendi class from the forthcoming damages award. On February 22, 2011 Judge Richard Holwell of the U.S. District Court for the Central District of California applied Morrison to exclude purchasers of ordinary shares via the Paris Bourse even though they were registered with the SEC. While both U.S. and non-U.S. purchasers of ADRs on the NYSE remained in the class, the removal of purchasers of ordinary shares was estimated by Vivendi's counsel to have reduced the potential damages by as much as 90%.   

Given the forced exodus of purchasers of ordinary Vivendi shares in the U.S. case, the question becomes if, when, and where investors may pursue their rights against Vivendi in other countries. It appears that at least one investor association (here) has taken the lead in pursuing a collective action against Vivendi in France. However, the proposed action by the 'Les Petits Porteurs De Vivendi" or "Small Holders of Vivendi" underscores the trouble that investors face when pursuing class actions outside of the U.S. or Canada. The request for participation in the Small Holders of Vivendi defense association is simply that, a request for participation. Since no settlement or judgment has been reached, participation in the association does not in itself guarantee a successful outcome at trial or at the negotiation table. And, it comes with an initial fee of 95 Euros.

Today is the one year anniversary of the seminal U.S. Supreme Court decision in Morrison v. National Australia Bank. The Morrison case was the first time the Supreme Court addressed the question of "f-cubed" securities fraud cases and was also the first decision regarding the extraterritorial application of the securities laws. The implications for investors trading in non-U.S. securities were so great that the case saw amicus briefs filed by some 35 of the largest non-U.S. institutional investors in the world as well as briefs submitted by the U.K., Northern Ireland, Australia, France, and non-U.S. companies, among others. For plaintiff friendly parties, however, the handing down of the decision was a heartbreaking event. In its attempt to draw clear lines of delineation for lower courts on the reach of the federal securities fraud laws the Court overturned more than 50 years of plaintiff friendly federal jurisprudence. It set the stage for what many thought would be the slow death of multi-national securities class actions in the U.S. As discussed more below, while many lower courts have applied a fairly literal interpretation of the opinion to the detriment of plaintiffs, it seems that changes in the securities class actions world since Morrison have been unexpectedly subtle.

Morrison Background

Prior to Morrison the "conduct and effects" test had been the dominant test in the circuit courts for determining whether plaintiffs trading in non-U.S. stocks had an implied right of action under the federal securities laws.  While application of the test often varied from circuit to circuit, at a minimum it allowed eligible U.S. investors who traded in non-U.S. stocks on non-U.S. exchanges to sue for securities fraud under federal law (so called f-squared cases). In many circuits, where significant fraud related conduct occurred in the U.S., the test was also used to apply subject-matter jurisdiction over non-U.S. plaintiffs who traded non-U.S. stocks on non-U.S. exchanges (so called f-cubed cases). Thus, the conduct and effects test allowed for truly multi-national securities class actions in certain circumstances.

The Morrison opinion expressly rejected the conduct and effects test as well as the possibility of f-cubed plaintiff actions. In its place, it created the seemingly more concrete "transactional test" for determining the extraterritorial application of the federal securities laws. The transactional test, the Court held, requires that federal securities fraud laws do not apply to  "transactions in securities listed on domestic exchanges, and domestic transactions in other securities."

When the Dodd-Frank Act passed into law last summer it failed to give private litigants the power to sue "aiders and abettors" under federal securities fraud laws. Despite the best efforts of some legislators, the final version of the bill merely authorized a study by the Government Accountability Office (GAO) into the propriety of an aiding and abetting private right of action. However, despite what seemed like a loss at the legislative level, plaintiffs recently had another opportunity to plead their case for expanding the scope of securities fraud liability. This time it was before the U.S. Supreme Court in the case of Janus Capital Group, Inc. v. First Derivative Traders. Unfortunately for plaintiffs, the opportunity presented by the Janus Capital case was dashed yesterday when, in a 5 to 4 decision delivered by Justice Clarence Thomas, the U.S. Supreme Court overturned the U.S. Court for the Fourth Circuit decision in 78 U.S.L.W. 3271 (U.S. June 28, 2010)(No. 09-525), which threatened to expand securities fraud liability under SEC Rule 10b-5 to actors who prepare and publish allegedly fraudulent statements.

In the Janus Capital case, investors in a collection of mutual funds sued the Janus Investment Fund and the funds' investment advisor, Janus Capital Management (JCM), alleging that the mutual funds were managed in a way that was not consistent with what was reported in their prospectuses, which resulted in a loss to investors. The U.S. District Court in Maryland dismissed the case holding that neither of the defendants actually made or prepared the prospectuses. But, in May 2007, the Fourth Circuit Court of Appeals reversed the District Court's ruling finding that the investors asserted a viable claim under Section 10(b) because the defendants helped to draft and disseminate prospectuses with misleading statements.

In a pivotal decision for shareholders, the U.S. Supreme Court ruled Monday in Erica P. John Fund v. Halliburton that loss causation must not be proved as a precursor to class certification (opinion available here). The ruling, which overturned the loss causation requirement of the U.S. Court of Appeals for the Fifth Circuit, averted what could have been a disaster for shareholders and plaintiffs' law firms seeking to recover assets lost due to fraud in securities class actions.

In order to certify a class under Federal Rule of Civil Procedure 23 a court must decide a number of issues. In particular, FRCP 23(b)(3) requires a court to ascertain whether "the questions of law or fact common to class members predominate over any questions affecting only individual members..." In a securities fraud case, this consideration often turns on the issue of whether the plaintiffs relied on material misstatements or omissions by a corporate defendant in making purchases or sales in the securities at issue. Naturally, showing factual reliance on particular statements by an issuer for each individual class member in a class action would be antithetical to the purpose of a class action (i.e. to litigate common issues among the class). Also, it would be difficult for many investors to do so when markets are complex and "impersonal." Therefore, class members in securities class actions have traditionally relied upon the "fraud on the market" theory to create a presumption of reliance. The theory simply states that the market is efficient and takes into account all available public information in arriving at stock prices. Thus, investors are presumed to act on all available market information by purchasing or selling on the price of a stock alone.